By Michael S. Derby
Aug 20 (Reuters) – Federal Reserve Bank of San Francisco President Mary Daly said on Thursday she’s not ready to judge how the Treasury Department’s moves to manage debt issuance will affect the central bank’s work, as she flagged the importance of getting inflation back to 2%.
Asked on Bloomberg’s television channel about the prospect of Treasury issuance patterns that could challenge how monetary policy works, Daly said “these are early days, and I wouldn’t want to be preemptive in sort of discussing those types of things until we’ve had a chance to think through those issues.”
She added the key issue for the central bank is less about the “mechanics” of how the Fed achieves its goal than its commitment to and performance in achieving those mandates.
Daly’s interview took place a day after the Treasury Department upsized existing buyback operations targeted at longer-dated government debt. The action came as the government’s long-term borrowing costs have been spiraling upward amid inflation worries and competition for investment flows, and the intervention’s benefit proved short-lived after yield declines Wednesday reversed on Thursday.
Daly noted that the rise in long-term yields is a global issue driven by an array of factors and “it doesn’t give us a lot of signal about what we should do in the policy adjustments or the policy calibration for the Fed.” She said shorter-dated bonds imply some looming Fed rate tightening and “seem to be signaling to us that they understand our reaction function.”
Daly said monetary policy was in a “good place” and that she strongly supported the Fed’s decision at the end of July to hold its 3.5% to 3.75% federal funds rate target range steady.
Daly was asked how the Fed might navigate a shift in Treasury debt issuance to more short-term borrowing over longer-term debt. More issuance at the front end of the market could put upward pressure on borrowing costs there, which could create challenges for how the Fed manages interest rate policy.
The Fed’s rate control system depends on influencing money market conditions to manage interest rates by way of a series of tools and liquidity facilities. Central bank officials have flagged what they see as great and long-running success in that endeavor. That said, shifting Treasury borrowing patterns raise questions as to who is the key manager of financial conditions.
Daly noted “the Treasury Secretary is different than the Fed” and added she’s confident the Fed can achieve the goals laid out for it by Congress and get inflation back to 2%.
“The important thing the American people need to know is that the Federal Reserve cares about its independence and its credibility and sticks to its remit,” Daly said.
The official also said that even with higher longer-term borrowing costs, “I don’t see our credibility at risk. I also hear a lot about, should we be making preemptive cuts or hikes” and “I don’t see a lot of evidence that that’s an urgent problem to solve” given how recent data has come in.
(Reporting by Michael S. Derby; Editing by Chizu Nomiyama)
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